SEC Amends Rules on Proxy Disclosure, Corporate Governance and Executive Compensation
On December 16, 2009, the U.S. Securities and Exchange Commission (the "SEC") adopted amendments to the SEC's rules that will enhance information provided in connection with proxy solicitations and in other reports filed with the SEC. These amendments relate to director and director nominee qualifications, the structure of board governance, fees paid to conflicts of interest, including compensation consultants and the relationship between a company’s overall compensation policy and its risk profile. The amended rules will become effective on February 28, 2010, so these rules will apply to most public companies during the 2010 proxy season. According to SEC Chairman Mary L. Schapiro, “Good corporate governance is a system in which those who manage a company – that is, officers and directors – are effectively held accountable for their decisions and performance. But accountability is impossible without transparency. By adopting these rules, we will improve the disclosure around risk, compensation, and corporate governance, thereby increasing accountability and directly benefiting investors.”
The following is a summary of the new and amended rules:
Amended Disclosures in Proxy Statements
Director and Nominee Qualifications
The SEC amended Item 401 of Regulation S-K to require expanded disclosure about the qualifications of each director and any nominee for director. Under these amendments, a company must disclose, for each director or nominee for director, the experience, skills or attributes, and qualifications that make the director qualified to serve as a director for that particular company. In addition, the amended rules will require directors to disclose any directorships held at public companies in the last five years, rather than current directorships only (as required under current rules). These amendments also expand the disclosure period for material legal proceedings involving directors or nominees for director from five years to ten years and expand the list of legal proceedings covered by the rules. The amendments will also require a company to discuss the role diversity plays in its selection process for directors. This new disclosure requirement will require companies with diversity policies to discuss how the policy is implemented and how the board assesses the effectiveness of the policy.
To comply with these rules, companies should institute a process for analysis and review of the demographics and skill set needed for an individual to serve on the board of such companies and how each incumbent board member meets those needs.
The SEC amended Item 407 of Regulation S-K and Schedule 14A to require disclosure regarding why a company believes its leadership structure is the best for the company under the particular circumstances. In particular, a company will now be required to disclose whether and why it has chosen to combine or separate the positions of chief executive officer and chairman of the board. If the roles are combined, the company must disclose whether it has a lead independent director and what role this director plays in the leadership of the company. In addition, a company will now be required to discuss its board's role in risk oversight and how this role affects the leadership structure of the company.
Annual Meeting Voting Results
The amended rules will require disclosure of shareholder voting results in Form 8-K, instead of the Form 10-K and Form 10-Q for the period in which the shareholder meeting occurred, which often would be filed months after the relevant meeting. This new Form 8-K requirement will require a company to disclose the results of a shareholder vote within four business days after the shareholder meeting at which the vote was held.
Disclosures Regarding Compensation Consultants
Enhanced Compensation Disclosure
The full text of amended rules is available on the SEC website at: www.sec.gov/rules/final/2009/33-9089.pdf.